Regular portfolio reviews with your Ameriprise financial advisor are always smart. Given expectations for more moderate growth in corporate earnings and stock prices in 2022 — compared to the many record highs for stock indexes last year — now is an especially good time. Your advisor can:
- Evaluate your allocation to equities.
- Rebalance the portfolio to your target asset allocation.
- Maintain a diversified investment mix.
Your advisor can also look at underperforming investments that no longer fit your strategy or that can be replaced by a similar investment with better growth prospects. This portfolio management strategy also presents opportunities for tax-loss harvesting.
How asset allocation and diversification work together
You might wonder how a diversified portfolio fits with an asset allocation strategy. Think of asset allocation as the overarching idea across four asset classes (see chart), with diversification being the more granular concept within. Diversification goes one step further to invest in multiple different stocks and bonds, for example, across a range of regions, sectors or industries. Together, both investment fundamentals can help reduce volatility in portfolio value and enhance growth potential over time.
The wisdom of an investment rebalance
An essential concept to manage risk is portfolio rebalancing. Your financial advisor provides recommendations to strategically move money among various assets. This is necessary because, over time, each asset class behaves distinctly.
Some stocks or bonds, for example, may enjoy a period of strong returns, while others lag.
If left unattended, a portfolio may evolve to a different risk profile compared to your original approach. Depending on your goals, this might mean you have too many stocks and too few bonds (or vice versa).
How investment losses may present tax-loss harvesting opportunities
During the portfolio review, you might decide to get rid of an underperforming investment that no longer supports your financial goals. Alternatively, maybe the company you invested in had a bad earnings quarter and the stock price dropped.
In either case, your Ameriprise financial advisor might recommend a tax-loss harvesting strategy in which you would:
- Sell the asset at a loss.
- Immediately reinvest in an asset that offers a similar risk/return profile as what you sold. (Or wait 30 days to reinvest in the same asset.)
- Use the loss for tax purposes to offset a gain in another part of your portfolio.
Tax-loss harvesting can be part of a year-round investment and tax strategy. However, taxes alone should not be the main driver of your investment strategy. Keep in mind:
- Rebalancing trades in nonqualified accounts generally have tax implications.
- Certain positions may be overweighted due to significant appreciation, and selling those positions generally triggers capital gains.
Personalized financial advice and investment recommendations
Your Ameriprise financial advisor is committed to helping you achieve your financial goals. Connect with them this year to review your goals and portfolio. They will offer personalized advice based on your financial goals and needs. Active tax-loss harvesting is an ongoing process, with specific tax requirements, so it is especially important to seek support from your advisor.